Kondratieff Winter and the Greenspan Indian Summer

When Greenspan made his recent remark that he knew how to beat the Kondratieff Winter, it brought to the forefront what had been an obscure problem in economics.  The Kondratieff Winter is the deflationary depression that follows a speculative bubble.  Every major bubble in US history has led to Kondratieff Winter: 1837, 1873, and of course 1929.  Fortunately, they don't happen very often - about once a generation.  Unfortunately, it is our time.  Greenspan's prescription is to provide massive liquidity, which he certainly has done since the dot-com bubble popped in 2000.  Has he staved it off?

The mainstream business press is beginning to focus on this issue.  The Wall Street Journal ran a front page report at on the conundrum that Greenspan faces: by providing such liquidity, he may have staved off the Kondratieff Winter (for the moment), but he has created distortions elsewhere, in the real estate bubble, increasing trade deficit and massive US borrowing from overseas.  The New York Times Sunday Magazine ran two pieces the same week, perhaps unintentionally connected, one on Gold Bugs patiently waiting for a return to a gold standard following a Dollar collapse due to excessive debt, which is the cause of the Kondratieff Winter; and the other one about semi-luminaries in Silicon Valley still striving to make a killing, having not made enough during the bubble ("$10 million is but chump change") - they still believe another bubble awaits their good fortune. Since then we have had so many real estate bubble stories that one could say that there is a real-estate-bubble STORY bubble.

This is a high contrast issue for investors.  In a Kondratieff Winter, cash is king, and one needs to conserve it to survive the period.  In a Kondratieff Spring, a rising tide lifts all boats, and an investor should be "all in."

Muddying the issue is that every crash has a bounce, a wave 2 or wave B, before continuing to drop.  Investors who were confident at the prior top are even more convinced during the bounce that they caught the bottom. Normally the bounce comes quickly, and ends quickly; but this drama has unfolded in an unnerving slow-motion for the past five years.  This makes it even harder to discern the onset - or the end - of the Kondratieff Winter. Which is it?  Investors remain bullish, and the Cassandra's are dismissed. (As a living example, check all the comments to the recent Wolf! Wolf! posts; the uber-Cassandra, Prechter, has called the top prematurely so many times his opinion is now a contrarian indicator.)  Yet we must remain cautious about whether 2003 marked the bottom.  The normal markers of a bear bottom were not present - low P/E ratios, lack of interest in equities, and a burst of new investment based on fundamentals.  Instead, we have the disturbing trend of massive US borrowing to keep the economy afloat, a truly unprecedented occurrence.

Clearly Greenspan's efforts, combined with Bush's fiscal profligation and the expense of the war in Iraq, have all contributed to smooth over the brief recession after 2000 and pave the way for a slow-motion unwinding of the excesses of the bubble.  We have experienced few of the types of problems that we went through in the three prior K-Winters.  Even the mildest of them, from 1873-1896, was a worse deflation, and in the final three years, 1893-96, a much steeper recession (they called it a Great Depression at the time).  Are we past it?  Did Greenspan stave it off?  Or is it awaiting us in the next ten years?

In the middle of the Greenspan Indian Summer, it is time to consider this issue. 

For background on the Kondratieff Wave, please refer back to an older Yelnick post, Kondratieff Rules, or scan the many web sites such as this one full of graphics from Ian Gordon. Suffice to say the K-Wave tracks a cycle of innovation.  It begins with a wonderful period when a new network technology is built out (canals, railroads, highways, jetways, and now the Internet): K-Spring. Then the hubris of success leads to overextending, into a foolish 'peak war' and excessive social programs that heat up into an out-of-control inflation: K-Summer.  A savior fixes the financial mess and we have a 'false plateau' based on financial engineering not fundamentals that ends in a speculative bubble: K-Fall.  The workout of the excess capacity and debt leads to a deflationary depression: K-Winter.  Then we come out of it, and it is Springtime for Investors again.  It is a tale of human achievement and excess, of virtue and vanity.

As Mark Twain said: "History does not repeat, but it does rhyme."

The hinge date in the current story is 2004.  Initially it was thought that the Kondratieff Wave would vary in time.  This makes sense for a cycle of innovation, as one would not expect innovation to proceed on a precise timetable.  Kondratieff's own work The Long Waves in Economic Life, done in the '20s but first published in November 1935 in The Review of Economic Statistics, concluded that: "The waves are not exactly the same length, their duration varying between 47 and 60 years."  Yet with more information than Kondratieff it appears the Kondratieff Long Wave is fairly consistent in time.  K-Waves II and III both lasted about the same length, around 54 years; and although there is some controversy over when K-Wave I started, the better case is that it too lasted about 54 years.  If so, K-Wave IV, which started in 1949, should have ended in 2003-2004.

It is worth diving into the controversy of dates.  Prechter himself has not helped here.  He and others first thought that K-Wave III ended in 1932, a really short period of only 36 years, and they predicted K-Wave IV would end in 1987, 54 years later. When the crash came, they were delighted, but they had already moved their analysis along by then to estimate the K-Wave end by around 2000, later modified in his book At The Crest of the Tidal Wave (1995) to 2003-4.  Please check some of the recent comments from Yelnick readers - some very good discussion of this issue, with sources, including this from the July 2000 EWT referring to the EWT in 1983, and this from Prechter's updated Elliott Wave Principle (1984).

Their delight was the belief that the '87 crash was the start of the K-Winter, and they had called it.  How wrong they proved to be.  In order to explain that away, Prechter now allows a fairly broad range for the K-Wave, pointing to K-Wave I which may have started as early as 1778, in the middle of the American Revolution, or as late as 1790, the beginning of growth following the sorting out of the economic mess left by the Revolution. The better argument is to put the beginning at 1789-1790.  After all, in 1787 the fledgling US replaced its initial Articles of Confederation with the Constitution, due among other reasons to the economic distress suffered under the Articles.  The unsung hero of the early Republic is Alexander Hamilton, who securitized the massive debt from the war, helped get the New York Stock Exchange off the ground (literally - they used to meet under a tree to trade), and began a 20 year economic boom that marked the K-Spring of K-Wave I.  Given a start of 1790, all three prior K-Waves have lasted around 54 years, a remarkably tight pattern of time.  So why is this time different?

It is a fundamental tenet of the Yelnick analysis that waves or cycles without underlying causality have NO predictive power.  None, zip, zilch, despite all of our attempts to make it seem so.  Man is very good at pattern recognition, and even better at rationalization after the fact.  Great mathematicians such as Fourier have embodied this principle in formulae, which allow any past pattern to be 'explained' by a series of waves or cycles of varying degree.  Ptolemy the astronomer is scorned today for his use of 'epicycles' to explain planetary motion as a series of embedded circles rather than ellipses as we now believe; yet his approach is not incorrect - it is an impressive instantiation of the Fourier principle - any ellipse can be recast a as series of perfect circles of varying degrees. But be careful - if you take to Vegas a complex pattern that explains even a long train of past random events accurately, you are still as likely to lose as win.

Prechter is going to great lengths to find the causality of Elliott Waves in Socioeconomics, a theory of waves of social mood based on biology.  It is proper and fitting that he does so.

Similarly, to explain why the K-Wave may have extended this time, we need to find its causality.  As Yelnick scans this arcania for you, look no further than the work of Bob Bronson. He finds the causality in the business cycle.  Originally, the core business cycle was 40 months.  It is often called the Kitchin Cycle after the person who first uncovered it in 1913.  It marks a normal period for forward inventory investment by American and British businesses.  Bronson found that 16 of these Kitchin Cycles make up a K-Wave, giving it 16 x 40 months or 53.3 years in length.  Since the era of modern management of the economy, and especially since Keynesian Economics gave policy support for much greater interference in the economy by government, the 40 month cycle has lengthened to 48 months, matching the four-year Presidential cycle.  Hence he now concludes that the K-Wave has lengthened as well to 16 x 48 months or 64 years, 10 years longer than before.

Thus: the bottom of K-Wave IV is now to be expected in 2014.   It is ahead of us.  And the worst period of it is about to begin. 

Comments

[Lance]

Elliot wave aside, there seems to be a strong correlation between the supposed 2000"top" and today with the period of 1927 to 1929. Both these periods experienced massive expantion of credit fueling higher prices in both financial and real assets, with the latter reaching back to levels not seen since the prior respective peeks in the rate of inflation (1921 and 1982). Yet, unlike the periods leading up to those inflationary peeks, long and short-term rates don't rise to their previous levels achieved before. Thus creating a "conundrum".

Also, the level of total debt as a ratio to GDP has skyrocketed to levels that common sense would suggest cannot be sustained. Once the expansion of credit had peaked, and will peak, a credit contraction ensued and will ensue. This is the Kondratieff winter everyone expects. One arguement I have with this great posting is that the Senior currency (British Pound durring 1700-1930's and the US Dollar since) gets stronger during the contraction of credit phase. This is caused by the supply of money decreasing relative to the supply of goods for sale and the reduction in the velocity of money. In any case cash will become KING again when sanity replaces today's insanity of intrest only loans, no down payment loans, sub-prime lending as a percentage of total lending,....etc. Just remember, the banks are lending your money, not theirs. And if you think FDIC will save you, research how long and how much depositors at recently bankrupt banks were reinbursed for their deposits (this during good times?). I'll get off my soap box now, thank you.

[EN]

This is an excellent piece Yelnick.

As regards the stock market, it does not seem to have the volatility associated with great bear markets of the past, at least not yet. If one calls 2000 to early 2003 the first part of the secular bear, then the action since the supposed top in March 2005 is very lazy. In fact, since Winter 2004, we have a series of overlapping waves in a rising wedge going nowhere fast. No several percentage point sell-offs per day or anything of the sort. Nothing dramatic at all. One is hard pressed to find the Nasdaq futures move a half percent overnight when in summer 2000 it was typical for them to swing 4% per evening session. So what gives? Will we have to wait to see the DOW down 1000 points in one day and showing no signs of life before we have returned to the second bear phase of the 2000-2014 bear?

Does anyone else share this concern that we can't have returned to a great bear with all this lazy trading range garbage for the past 18 months?

[No bear yet]

Kondratieff Winter is over.

Iraq War was the TROUGH WAR that locked the final Kondratieff Cycle low in stone.

You'll see.

Only the Kitchin Cycle is rolling over here and bearish into 2006.

Short 2006 lows at your own peril. Kondratieff, Kicthin and Juglar cycles begin FULL UP PHASE.

[No bear yet]

Kondratieff Wave is timed by wars.

Top Wars
- War of 1812 – Ended Kondratieff summer
- Civil War – Ended Kondratieff summer
- World War 1 – Ended Kondratieff summer
- Vietnam War – Ended Kondratieff summer

Trough Wars
- Mexican American War – Ended Kondratieff winter
- Indian Wars/Spanish American War – Ended Kondratieff winter
- World War 2 – Ended Kondratieff winter
- 2003 Iraq War – Ended Kondratieff winter

[No bear yet]

Neely is calling for a 900-1000 point Dow Jones c-wave rally starting in about week and a half.

Does Prechters latest STU see the 1000 point rally coming?

If Prechter misses this next monster August rally, I recommend canceling your STU subscriptions and switching to NEoWave.

[EN]

I would be very surprised if this thing crashed in a third of a third anytime soon. Just look at the Nasdaq and how impulsive it has been since April. All the up moves are violent and the downmoves take forever. Maybe Prechter's follower's covering their shorts in despair?

[RJ]

I can hear Prechter now. He is probably screaming another Wolf that we just completed an A-B-C and this is 2 of 2 of 2 of 2 of 2 of 2.

[No bear yet]

EN I agree with your scenario.

I extended a NEoWave chart so everyone can get a feel to where we are.

Chart here...
http://x3.putfile.com/7/18512032227.jpg

[Jim Arthur]

Just buy what that Jim Cramer says on Mad Money because he makes better picks than that EWI guys. You just follow Jim all the way to the bank. And its free!! no big monthly fee for that advice.

[bulls kick prechter's butt]

Prechter has led his sheeplike followers to the slaughter again. Like the lemmings they are, watch them drown in wave after wave of massive upside moves that will take out 11,000, 12,000 and MARK MY WORDS 100,000 before 2015. This is a tidal wave... on the UPSIDE. I further predict that Prechter will hang it up before the end of the year. It would just be too absurd to continue.

[Achal]

Don't think so...remember, even Neely thinks a correction later in the year will come (just not Armageddon). That should provide enough ammo to keep Armageddon fears alive.

On a separate note, this site seems to have become a Prechter hate-joke-fest. Wouldn't it be ironic if he were right after all, however unlikely it seems? :-) That would be Mr. Market's "unkindest cut of all".

[No bear yet]

Prechter will never be right as long as he labels 2000 as Supercycle wave V and the K-Wave bottom at 2011.

If he labels 2000 as wave IV and K-Wave lows at 2003 he still has a chance to catch the next 5th wave extensions up to Dow 50,000 and eventually Dow 100,000.

[Dow 50,000 should occur in Kondratieff Summer (2020-30's) Dow 100,000 should occur in Kondratieff Fall (2040's)]

[No bear yet]

No bear yet wrote: "If he labels 2000 as wave IV"

Typo....label 2000 as *beginning* of wave IV

[Achal]

From the Dec 2004 EWT issue: He labels 2000 as the top of Supercycle Wave III (circle).He expects IV (circle) to last a century, in a A-B-C-D-E zigzag, with A taking the Dow below 400!

Oh well, I am off to vacation. Such dreary thoughts!

[Achal]

Also, on the attached graph, he does show B hitting a marginal new peak about the all-time Dow high.

[bulls rule]

I don't hate Prechter but I love Neely. He is so supersmart and his predictions have generally been dead on. If you want a horse to bet on, he's the one. He's right maybe 9 times out of ten and his methodology is highly scientific. Science is the only way to make sense of this madness and Neely seems to have a PhD with honors in prediction.

[No bear yet]

Neely count is still working fine here.
http://x3.putfile.com/7/18512032227.jpg

Next week is final exam for Neely vs. Prechter.

Who will win? Neely "blastoff up" or Prechter "meltdown 3 of 3 crash".

Neely will.

[elliottmind2000]

Yes. Neely will. Neely's count is working quite nicely, thank you. Very nicely indeed. As for Prechter's count, it seems, shall we say, a bit off? As in way off? As in catastrophically, horribly, pathetically, predictably off? 2 of 2 of 2 of 2... Please. I've heard it all before. Maybe you'll be right... in 100 years!

[elliottmind2000]

Yes. Neely will. Neely's count is working quite nicely, thank you. Very nicely indeed. As for Prechter's count, it seems, shall we say, a bit off? As in way off? As in catastrophically, horribly, pathetically, predictably off? 2 of 2 of 2 of 2... Please. I've heard it all before. Maybe you'll be right... in 100 years!

[EN]

Does anybody know what Neely is calling for after this upswing C wave to 1265? Is it an X wave down into 2006/7? If so, how deep a correction? (I know he said that he does not think the October 2002 lows will be broken again).

[No bear yet (but its getting closer)]

After this run to 1260 completes we are going to see a very complex correction down to SPX 1050/Dow 9300 area.

Not sure how it will unfold yet.

1. Either as a friendly bear market 1700 point Dow decline

or

2. A bucking bronco wave 2 of C run up to SPX 1300 into an October crash.

We're setting up here for a nice drop either way.

[Donovan]

I doubt there will be much of a bear this year. If there's an October "crash" it will only be about 5-7%. Neely called this one perfectly. His calls are easy to follow and his annotations are excellent. I appreciate his service and recommend it strongly. It's a bargain. Prechter, on the other hand, is a sure way to the poor house. His site is so middlebrow and cheesy, like a bad telemarketing caller. It's repetitive, predictable, and appeals to an angry, not-too-bright audience.

[No bear yet]

EN wrote: "Is it an X wave down into 2006/7? If so, how deep a correction?"

Neely labels it as an X yep.

March highs were wave (G) and we now are in (b) of an (a)-(b)-(c) down into X which could only be as low as 1150 area according to the NEoWave diametric.

I use traditonal Elliott and I see about 100 SPX points lower than Neely.

1050-1150 will be the target zone for buying this dip.

[Yep]

Prechter isnt a trader he is a bookseller.

The only difference between Prechter and Matthew Lesko is Prechter doesnt wear question marks on his suit.

[EN]

It looks like the c WAVE advance may have started yesterday? The Nasdaq just closed above major resistance. The S&P futures came down to 1170 the other night, perhaps that is enough to get the ball rolling to the upside now.

[Virchull]

This "Kondratieff Winter" stuff with a 54 year cycle was invented by someone else who wanted to sell books. Kondratieff never identified Spring, Winter or any other season, and he did not say there was a 54 year cycle. It is hard to find his original work, but the graphs that he used show economic cycles in the 1700 and 1800's that varied in length from about 50 years to about 65 years. This is a pretty wide variance for stock market forecasting !, and Old K didn't invent the idea for the purpose of forecasting. He was trying to understand the workings of capital in an economy. Retrospectively, after some future crash, somebody will claim (and write a book!) that they forecast the K Winter, but it will be BS. K waves are an interesting economic idea, but nobody can forecast anything with a K wave. There are too many intervening variables.

Enjoy,

[No bear yet]

EN wrote: "It looks like the c WAVE advance may have started yesterday? "

Yep. Neely had an alternate count of the b-wave low coming in early, looks like thats what happened.

Last obstacle to this 600-900 point Dow rally is July 18-19 Spiral Calendar lows which will probably be the WAVE 2 of C lows.

Next week should be a down week. Lock and load on Monday July 18... profitable 3 of C upside trading to ALL.

[gregory davis]

We not only face an economic winter but a depressionary force much greater than the 1930s to a degree which threatens the survival of the human race. This degree comes every 1000 years.the last 7000th is even larger than the prior ones in which god himself will intervene just to save man from total elimination

[Alan Slawter]

What about the petro-euro? If 8 trillion is no problem, why not borrow 16 trillion more and develop energy independence and everything else we can dream of. Wake up. The world is a complex place and there's no man that knows what will happen tomorrow let alone 10 years from now. Don't be so arrogant. You think you know, but you don't.